Ep. 55 Krugman, Trump, and Trade

9 October 2016     |     Tom Woods     |     7

Krugman says it’s not just Trump who’s an ignoramus, but his economic advisors, too: why, they seem to think a foreign VAT (value-added tax) hurts US exporters. We investigate, and turns out these guys are against fiscal and monetary stimulus — how bad could they be? Yes, there are some problems in the Trump white paper, but there’s a lot of good in it, too. And its key fallacy on trade accounting is something Krugman himself has pushed in other contexts.

Krugman Column

VAT of Deplorables” (Sept. 28, 2016)

Contra Columns

Thoughts On Trump’s 1995 Tax Return,” by Bob Murphy
Krugman Falls into the Keynesian Accounting Trap,” by Bob Murphy
The Economic Effects of Unlocking Federal Lands,” (The Institute for Energy Research)

White Paper Discussed

Scoring the Trump Economic Plan: Trade, Regulatory, & Energy Policy Impacts” (PDF) by Peter Navarro and Wilbur Ross

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  • Younes M

    I think Bob is mistakenly defending the Trump advisors’ argument on the VAT. First of all, foreign governments not only impose VAT but generally also impose corporate income taxes on their domestic companies. Given that, I don’t see what difference the VAT refund makes.
    It is true, though, that some foreign governments exempt their domestic companies’ foreign income from corporate tax. Which would then make the argument, that the US federal government does not offer a similar exemption. And that would indeed disadvantage American companies. Except for the fact that foreign companies doing business in the US are also subject to the US corporate income tax.
    To recap, if we take the example of American-French trade :
    – an American company selling in France would pay VAT to the French government and CIT to the US government while competing with French companies which are, for their domestic sales, paying both VAT and CIT to the French government
    – an American company would pay only CIT income tax for its domestic income to the US Federal government, while competing with a French company, which pays CIT to the US govenments all the same, while being exempt from VAT and CIT for its American sales in regards to the French government
    So it basically evens out. The only difference would be in terms of the rates of corporate income tax, but that’s a completely different argument than the one Trump advisors are making. I gotta give this one to Krugman. The mistake seems to be thinking that some foreign governments levy VAT in lieu of CIT, which I don’t believe to be true.

  • Anders Hass

    VAT in Denmark is “just” 25 % of the price of the thing you sell added to the final price the consumer pays. So if I sell a six pack for 100 DKK then the price the buyer have to pay is 125 DKK.

    If you buy something as a company to the company then you report that you have done that and get money back from the added VAT the seller had.

  • bogart1

    Krugman and his buds are wrong, the VAT is not in any way just like a sales tax to the people having to compute it and then pay it. I looked up “VAT tax problems England” and found dozens of articles from England of people having terrible times computing VAT taxes. These VAT taxes are just like the income taxes in the USA where different people have different computations. And the effects of the VAT just like the really crappy corporate income taxes fall on the small business who do not have resources to manage them.

  • Adrian Gutierrez

    I was thoroughly impressed by D Murphy’s responses. He is the new Rothbard and I admire his intransigent abilities to constantly promote standard Austrian theory. There should never be a situation where offsetting tax cuts with tax hikes is anywhere free-market oriented.

  • Ma Jun

    Younes is absolutely correct on both how the VAT works as well as on the prevalence of corporate income taxes levied in all of Europe in addition to the share of the VAT-burden a company bears (depending on demand elasticity, the VAT-burden is shared between seller & buyer i.e. company and end-consumer).

    Where it exists – it is simply added to the selling price of any good or service. As no competitor – neither domestic nor foreign – can sell without the tax being added, it does not distort competition at all.

    Besides, Europe is not the primary target for outright off-shoring of American manufacturing jobs anyways. Because of geographic proximity, NAFTA and a much greater wage differential vis-a-vis the US, that is Mexico’s role. (Of course there are more subtle effects such as American exporters losing market share to cheaper competitors elsewhere.)

    Also, not all European countries are equally competitive. In fact, especially southern Europe’s industry has been suffering from a steep increase in unit labor cost in the 2000s while Germany managed to reduce them. This trend has started to reverse itself recently, but anecdotal evidence of the consequences abide. For reference, have a look at this example from the tire industry:

    http://business.time.com/2013/02/01/goodyears-french-nightmare/

    Lastly, I would like to ask Bob not to underestimate the economic understanding of the CK-audience. Obviously – and the informed posts in the commentary section prove that – the people listening to this podcast aren’t exactly your average-Joe-from-the-bar-down-the-street type of caliber. You are by no means overstraining us by discussing corporate taxation or international trade. So don’t hesitate to come with the challenging topics 🙂

  • http://www.economicmanblog.com Roger Barris

    A couple of things here, both in response to the podcast and some of the comments:

    1. Wilbur Ross, FYI, is a investor in distressed assets, such as defaulted loans and companies under financial distress. Like many of Trump’s “economic advisors” — Wilbur Ross, Tom Barrack, Steve Mnuchin (my former boss), Steve Roth (although he is now denying any connection to the Trump campaign) — he is an investor with no particular understanding of economics, although at least Ross is a good investor, unlike some of the others. Almost all of them, however, are really financial investors and not even managers/owners/founders of operating companies. See the first article here: http://www.economicmanblog.com/2016/05/07/the-morning-after/.

    2. The point on corporate income tax (CIT) creating competitive trade advantages is completely wrong. So, Tom’s comment about the high US CIT, and Bob’s comment about the motivation to move offshore to avoid the US’ high CIT, are wrong. Trade is driven by comparative advantage and not absolute advantage. Differential CIT rates can drive absolute differences in costs, but these will be washed out by foreign exchange movements. (For example, if US taxes doubled the cost of manufacturing everything in America, to take an extreme case, this means that the value of the US dollar would fall in half to re-establish equilibrium.) So, the absolute level of CIT(ASSUMING THEY ARE UNIFORMLY APPLIED) is irrelevant in determining trade flows.

    3. VAT does not create incentives or disincentives to trade — Krugman is right on this. This has nothing to do with the fact that all European countries also impose CIT — the comments by @disqus_t4RrUCQlNp:disqus and @disqus_9se4DjAOXA:disqus about CIT, although factually correct, are irrelevant. As indicated in point 2 above, differences in CITrates (including the extreme case of no CIT, eg., a zero rate) do not affect trade flows.

    4. To answer the question that Tom asked about the repatriation of offshore money possibly causing inflation in the USA, the answer is “no.” Bob got this mostly right. Dollars never leave America (except for the trivial case of the ones carried in travellers’ pockets). The only thing that changes is their ownership. Currently, for example, Apple’s Irish subsidiary owns an bunch of US$ deposits which are held, ultimately, by an American bank, where they are available to support lending, consumption, etc., in America. If they were “repatriated,” then the ownership of this deposit would change to a US subsidiary of Apple, but otherwise nothing would change. As Bob pointed out, it is not like there are all these US $100 bills waiting offshore to come back to America and drive up prices.

    5. One of the things that is never discussed about Trump and trade is that the flip side of a balance of trade deficit is a shortage of domestic net savings. In other words, one way to look at America’s trade deficit is simply as a reflection of the fact that we consume too much and save too little. (Germany, which has the world’s largest trade surplus, is frequently scolded for saving too much.) One of the sources of this shortage of savings is government fiscal deficits. To the extent that Trump’s tax and expenditure plans would create more fiscal deficits, then these would have the tendency to increase trade deficits. Trump doesn’t talk about his much, although to be frank, he probably would never understand the point.

  • strasilo

    Coming from a Trump supporter

    On the question of international trade he is kind of wrong. $ is a world
    reserve currency, and as long a $ remains world reserve currency, US will run trade deficits. Google Triffin dilemma. You can probably change that by listing Saudi Arabia as a country sponsor of terrorism and crash $ along the way, but unfortunately that will not happen.

    That’s not to say US economy can’t become relatively more competitive inside existing reserve currency framework = (potentially much) smaller trade deficits.

    On the question of removing double corporate income taxation, yes, capital will flow back to the US.

    Look at it this way. For foreign and domestic investment to be equally profitable today, ROE on domestic investments has to outperform ROE on foreign investments enough to recuperate costs of moving capital back into the US. And it doesn’t matter if those costs are paid income taxes or bank fees in some mumbo jumbo schemes used to bring that capital back under the radar.

    If nothing else, that will level positions of domestic/international corporations and remove incentives for corporate inversions, and that’s a good thing by itself because inversions are a waste from a standpoint of efficiency. Think of all the actually useful things Pfizer board could be doing instead of planning inversion!